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Tuesday, March 01, 2016

How Does an Airline Go Bankrupt with Fuel This Cheap?

Republic operated E175 jet in American Eagle Livery

Earlier this week Republic Airlines declared bankruptcy stating that a lack of pilots resulted in lost revenue due to grounded flights. Anyone in the travelling public reading this story must be confused as to how an airline can go bankrupt in this time of cheap fuel. After all, planes are jammed full and stories of record profits being set by airlines abound.

To understand all this, it is important to note that Republic isn't a "real" airline in the customary sense. That is, you can't go online and buy a ticket on Republic Airlines. Republic, like most "regional" airlines, is simply a provider of aircraft and crews to their major airline partners. Their aircraft are flown under the banners of American Eagle, United Express, and Delta Connection.

The agreements which bind Republic and other similar airlines to their partners, known as "capacity purchase agreements", delineate the terms under which aircraft and crews are provided to fill the schedules dictated by those major airline partners. Once signed, as with any contract, the terms are set. And again, as with any business contract, there are likely a host of penalties imposed for non-performance of the terms of those contracts. This is all routine business stuff.

Revenue Restricted but Costs Unbound

The regionals, then, are bound on the revenue side of their ledger by the contracts they've signed. They don't get to raise prices on their flying customers because they don't really have any. Their customers are the major airlines with whom they have signed contracts. Passengers are the cargo who incidentally happen to be on the airplane. You can easily see how incentives are aligned for the "enhanced" customer experience that most regional airlines provide.

The only way for a regional airline to increase profit, then, is by reducing costs.

One cost input that most likely wasn't considered highly variable was that of labor, specifically pilots. One of the main reasons the regional airline model even exists is that it functioned as an end run around union contracts at the major airlines. Several decades ago major airline unions (ALPA, APA) allowed loopholes in their contracts allowing their airlines to outsource the operation of smaller aircraft thinking that the amount of flying would remain small.

That was a strategic mistake for the unions as "regional" airlines grew unabated using new fast and capable jets. Regional airline enplanements grew from 27 million passengers in 1985 to about 160 million passengers in 2014 taking a huge bite out of the flying done by the unionized pilots at the major network carriers. The reduced costs from the regional airline operations also allowed the major airlines to field a competitive response to the explosive growth of younger low cost carriers (LCCs), notably Southwest.

The Model Breaks Down

That model more or less worked because younger pilots were willing to accept the low wages offered by the regional carriers in exchange for the flight hours they needed to apply for a job at the major airlines where the money is. In a sense it was a deal with the devil because the existence of the low paying regional jobs came at the expense of the higher paying flying at the majors. It might have been considered an industry wide "B" scale, but the model persisted.

With the crash of Colgan 3407 and the subsequent legislation which raised the minimum hours required for any pilot to work at a regional by five times, the wheels have apparently come off. Any pilot who wishes to work for any commercial airline must now have a minimum of 1500 hours.

This new requirement has effectively shut down the pipeline for new pilots. As the major airlines now must hire thousands of pilots to replace retiring pilots, the regionals are losing pilots faster than they can be replaced causing them to cancel flights for a lack of pilots.

Republic itself was losing around 40 pilots per month and couldn't cover their schedule. This meant lost revenue. Last year Republic was even sued by Delta for breach of contract in not fulfilling its obligations, the irony being that Delta is hiring away many of Republic's pilots.

A result of the pilot shortage is a bidding war for the fewer pilots remaining available for hire. One need only click over to the Republic corporate home page to see multiple appeals to prospective pilots. For pilots with the requisite number of hours, it's a good time to be looking for a flying job.

As far as the Republic bankruptcy is concerned, this is nothing more than a renegotiation opener by Republic to gain more favorable terms with its major partners while avoiding the penalties in its existing contracts. As the pilot shortage worsens, fares will likely increase and service to smaller cities is likely to be curtailed or ended.

Are We any Safer?

A good way to start a bar fight or internet brawl on a pilot forum is to question the need for the higher hours requirement. It should be noted that both the Colgan pilots far exceeded the new hours requirements. The problem in that crash was identified as a weak captain and fatigue. It should also be noted that the Air Force routinely puts its pilots in the seat of advanced fighter and multiengine heavy transport aircraft with only about 200 hours of experience. I know because I was one of them.

That said, it appears to be highly unlikely that the 1500 hour requirement will be relaxed any time soon. The topic is simply too much of a political hot potato. My guess is that we will see more shrinkage and possible bankruptcies of regional airlines along with major airlines bringing some of that flying in-house in order to keep ahold of their pilots.

5 comments:

So where are we going from here? There are very few American pilots in U.S. flight schools, and 18,000 airline pilots approaching retirement. In the next six years half the pilots at the major U.S. airlines will have to retire, if they all make it to age 65. That means a massive reduction in airline capacity is coming, soon. Major airlines hiring regional pilots does not equal maintaining the capacity of this infrastructure our economy very much depends on. Regional airlines are major airline capacity. We can't switch to trains and ships, there is no replacement for the airline industry, and currently no replacement for the pilots needed to operate the airline industry.

We aren't going to hire a lot of pilots from overseas, because most of the world is in a pilot shortage crisis, with rapidly increasing demand for more airline capacity. We aren't going to start training MPL pilots, no young people want to do that either, they aren't stupid. Working pilots more hours is unlikely, we are already working them to fatigue limits.

Automation is the only obvious choice, and the industry has been working hard on it. DARPA's ALIAS program has working robots for existing (older) airplanes, and is developing robots for existing airline cockpits. Replacing one pilot in cargo planes would be a very big reduction in pilot requirements, and would usher in single-pilot airliners down the road.

This isn't something a decade or more from now, we need it in less than six years, and the automation will be ready within the next two years, probably less. I know you have expressed doubts about this timeframe, but you don't work in automation. As a guy who has worked in industrial automation for many decades, I can tell you we are entering into some frightening territory. Things I thought could not be automated are not only automated, but are improving rapidly. Automation for airliners is not especially challenging or expensive compared to things we have around us every day now.

This news, of course, won't help with recruiting new pilots. The process began with military drones and self-driving cars, young people saw the potential for pilots to be reduced or eliminated, and it is one reason they stopped entering the pilot profession. More automation, to deal with the lack of pilots, will lead to fewer pilots, and more automation. Rapidly.

An excellent question indeed...where do we go from here? I'll defer to your expertise in automation. I have a EE degree myself and am aware that the state of the art is quite advanced, but I don't follow the technical journals too closely so I have no reason to question your estimates. I have little doubt that the minute a single pilot freighter becomes available, Fred Smith over at Fedex will relish firing half his pilots.

Did you get a chance to view the video link I posted in a recent reply? There's little doubt that robots are coming. Here it is if you missed it: https://www.youtube.com/watch?v=7Pq-S557XQU

I still believe, though, that the greatest obstacles to single and pilotless airliners in the near term will be social and legal. It will be a long education process to get people used to getting on a single pilot airliner.

But, as an aside, I'd like to pick your brain on the current state of automation. As you may have heard, there were no fatal airline accidents in the US for 2015...an impressive feat given the amount of miles flown.

In your estimation, what sort of MTBF rates for the latest automation systems are we contemplating? Is the current state of automation able to readily achieve the current levels of reliability and safety?

I think it can safely be assumed that the single pilot in an completely automated aircraft will be bored out of his mind and most likely reading a book for most operations. He will likely be the first to arrive at any automation induced accident and not available to "save the day" should something go wrong.

The accident figures for 2013 were 2.8e-6 accidents per departure with humans at the wheel.

In your estimation, will the current state of automation match or exceed these rates?

Lastly, you mentioned earlier that the 787 was designed and capable of fully autonomous operation. Does that aircraft as currently deployed have onboard sensors and logic which would for instance stop it from taxiing over a baggage cart left in the safety zone?

I only mention this because taxiing is one of the most hazardous aspects of airline operations. A single pilot would have a very limited view out of the other side of the aircraft. I realize that there are work-arounds, but to your knowledge, are they currently deployed or currently designed in and ready for deployment?

Fascinating video, thanks! I go to factories with huge parking lots, with weeds growing in them, few cars. They are putting out more product than ever, with very few workers. Part of most factories are offices, big factories have big office buildings attached. These are mostly empty now, or leased out to someone who needs office space. The office worker functions are done by the machines and networks of computers around the country, all communicating orders and inventory levels.

With few workers, companies don't need HR departments, don't need air conditioning or heating or bathrooms or office cleaners coming in at night. No vending machines, no printer repairmen, no plumbers or electricians to maintain offices. There are empty food stands and gas stations around these factories, empty neighborhoods and schools and churches and stores. A manager I work with grew up in a vacant neighborhood I go through, around one of these factories. This happened recently, but it looks like the place died long ago. This is not the future we are talking about.

As far as taxiing, there are several existing auto-taxi schemes that have been operated on a limited scale by airlines and airports, using tugs or electric motors in nose wheels. They have sensor arrays to prevent collisions. Airport ground radars are also getting rapidly better and have prevented numerous collisions by alerting ground controllers. We are already automating monitoring and controlling of airport ground traffic. A single pilot would have a lot of help from cameras, and simple collision-detection technology that is widely used outside the airline industry. It is amazing to me this hasn't already been fitted to every airliner, but newer planes seem to at least have external cameras.

Ahh...tugs with sensor arrays. Makes the most sense. Many airlines are using tugs extensively for not only pushback but taxi to the runway as well for fuel savings.

This sort of transition will take a huge capital investment, though. A dumb tug that pushes a 737 is close to $100k and the airline would likely need to double the existing number of tugs. Multiply that by over 100 airports in the network and it becomes real money.

I recently read an article in IEEE Spectrum asking why automation hasn't made further inroads into commercial aviation (http://tinyurl.com/jtmjagq) The answers given were part technical but as I mentioned before social as well. The technical issues will be solved before the legal, economic and social ones are.

Airlines are perfectly happy to kick this very expensive can down the road for as long as they can is my guess.

Another aspect I see affecting the timeline for the deployment of pilotless planes is regulatory. When my airline implemented RNP functionality, it took nearly six years to deploy an already developed technology. Much of this was just getting government approval and implementation.

Getting approval and implementation of replacing paper filled flight bags with an iPad EFB took nearly 8 years from project inception to deployment. In aviation, things seem to move at a glacial pace.

With such a quantum change as a single or no pilot aircraft, deployment may be longer than anyone thinks.

Currently the FAA will not even permit drones to fly outside of VLOS, and those rules were just implemented. Clearly there will be many obstacles other than purely technical ones.

Remember the Great Sequester of 2013? The government was going to shut down, the U.S. was going to default on it's loans, the economy was going to grind to a halt, society was going to break down. It was Armageddon, and nobody in Washington was going to budge no matter how catastrophic the results. Then the FAA slowed down the airlines and threatened to shutter 149 towers across the country. Suddenly lawmakers flew back to Washington for an all-night meeting to save the country from this horrific problem.

Yes, aviation law moves at a glacial pace normally, but that is an example of what happens when our lawmakers, businesses, and wealthier voters, lose their easy travel privileges. This is new ground, our economy has never been so dependent on airline travel, and we have never had such a big and lasting shortage of pilots. Previous pilot shortages slowed expansion of a much smaller airline industry, this one will really hurt the economy. Lawmakers will be highly motivated to follow the advice of major airline executives.

I welcome feedback. If you have any comments, questions or requests for future topics, please feel free to comment. Comment moderation is on to reduce spam, but I'll post all legit comments.Thanks for stopping by and don't forget to visit my Facebook page!